The Pound Trades Like An Old Beach Roller Coaster

by: Dean Popplewell

By Stephen Innes

The Pound continues to trade like an old beach roller coaster.

Equity markets have remained cheered up by the passage of the Senate tax reform bill. But the market closed below intraday high water marks as renewed weakness in the tech sector weighed at the bell. However, it’s not as if the tech sector is under stress but rather some equities rotation remains in vogue as investors seek out opportunities in more tax-reform-sensitive stocks.

So much for what was supposed to be the dollar’s day in the Sun, the G-10 focus was all about Brexit and Cable.

The British Pound

Last night's crucial negotiations put the pound through a wringer. The initial headlines looked positive after some encouraging news on the almost unresolvable question of the Irish border sent the pound skyrocketing to 1.3540. The move was then wholly unwound and some when "no complete deal today" was announced. While the Brexit divorce arrangements looked close on Monday, the talks failed as the DUP reservations scuttled the proposal.

As is so often the case in FX markets, after all was said and done, we are right back to where we started.

The Japanese Yen

The USDJPY has come under pressure on reports Japan is readying its "intercept command system starting in fiscal 2018 to cope with advancements in North Korea’s weapons technology, such as faster-descending missiles launched at a steeper trajectory"( Nikkei news). But the USDJPY and US yields were trading with a heavy tone overnight almost as if waiting for the next wave of risk aversion to rear its ugly head and this morning’s geopolitical gamesmanship continues to validate this concern.

On the flip side, one of the best trades of the year has been to fade USDJPY’s geopolitical hysterics, but this move is far too shallow to bring out risk hunters; but regardless, it is hard to envision a broader push lower given the more widespread positive USD sentiment. And at least for today, it looks like we’re back to the old tug of war between US yields and risk sentiment as we settle back into the battle-tested 111.75-113.25 range.

The Euro

Not sure if it’s year-end creeping in early but the euro refuses to show any clear direction, so providing market commentary is turning into an exercise in repetition. But it could be a case of the market in total data focus mode and unwilling to commit to any direction ahead of US NFP or more precisely the wages component. However, most traders remain incredibly constructive on the euro, but as year-end approaches, traders are timing their entry decision more precisely.

The Australian Dollar

RBA decision day, comments to follow.

In early trade, the Aussie is picking up some pre-RBA steam from the positive retail sales print.

Energy market

Traders are starting to look over their shoulder at a potential shale production swell. Invariably, we end up back at this inflexion point time and time again, which continues to undercut OPEC reduction momentum.

Also, there could be some year-end decision at play as trading the "turn" can be full of liquidity surprises.

Asia FX

The Good, Bad, and Ugly for regional currencies as idiosyncratic narratives are driving trading decisions.

The Malaysian Ringgit (The Good)

A fantastic 24 hours for the ringgit as yesterday’s PMI, hitting 43 months high at 52 supports the hawkish BNM narrative. The Malaysian Central Bank has sounded overtly hawkish of late and appears more open to a stronger currency to ward off potential inflation.

Given the market is baking in January rate hike with a likely Q2 or 3 follow-up, the MYR will become much more sensitive to economic data for the next few months. And this is what happened yesterday as the ringgit surged on very supportive data.

However, a follow-up rate hike in Q2 or 3, well, is 100% data dependent, suggesting we will continue to see the ringgit trade more sensitive to Growth and Inflation headlines for the next few months.

Also, foreigners were noted buyers on local equity markets which added to the frothy MYR conditions.

The market remains underweighted on MYR; so despite more naysayers jumping on the wagon, there is still lot of room on the party bus.

Korean Won (The Bad)

The USDKRW has continued to trade dollar bid in the wake of the dovish BoK hike. Investor propensity to move out of tech into financial stocks dulls KOSPI sentiment. And risk aversion blip on Japan's defence system headlines isn’t helping KRW risk this morning.

The Philippine Peso (The Ugly)

A horrible 24 hours for the local currency as both the PSEi and the peso cratered. Whatever tactical shorts were entered last week on the regional wave of positivity gave way to more aggressive USD buying post-US tax reform.

To put the local equity market move in perspective, Philippine stocks suffered one of the most significant 2-day drops this year!

But this reinforces the view that there remains substantial structural differences at play in the peso relative to regional peers. Last week there was little if any sizable stock or bond inflow to drive or sustain momentum, which left the PHP extremely susceptible to a stronger USD narrative.

Market Musings

Why isn’t the dollar trading higher?

1) Extremely unclear what the actual GDP impact will be relative to Budget woes.
2) Political risk will forever be baked into the USD narrative so long as President Trump remains in office
3) The dollar momentum is more about Fed Funds rate and inflation rather than tax reform